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Open door, closed minds (FEER 14.12



Subject: Open door, closed minds (FEER 14.12.89)

/* Posted 7 Jan 10:00pm 1997 by drunoo@xxxxxxxxxxxx in igc:reg.burma */
/* -----------" Open door, closed minds (14/12/89) "----------- */

FEER: 14 DECEMBER 1989
----------------------
Open door, closed minds
Burma's half-hearted way to capitalism fails to convince investors
By Bertil Lintner in Bangkok
----------------------------
Despite purportedly liberal foreign investment laws, foreign business
interest in Burma is being stymied by short-term uncertainities, a
massively over-valued currency, and long-term doubts about the durability
and acceptability of the Burmese regime.

Burma was once one of the most prosperous countries in the region, but more
than two-and-a-half decades of teh "Burmese Way to Socialism" left economic
wreckage in its wake. The eventual outcome was a severe economic crisis
which triggered last year's natiowide uprising against military rule.

When the military decided to re-assert power on 18 September 1988, Burma's
foreign-exchange reserves stood at less than US$10 million, the foreign
debt amounted to nearly 70% of GNP, and the debt service ratio was
estimated at anything between 58% and 90% depending on the analysis. With
foreign aid cut off as a result of international condemnation of the mass
killings which followed the coup, new approaches became crucial for teh
survival of the military regime. It is against this background that the new
economic policies took shape.

The IMF, the World Bank, the Asian Development Bank and Japan, formerly
Burma's largest aid donor, made it clear during visits to Burma in late
October that they remain unimpressed. And though trade delegations --
especially Thai and Singaporean -- now arrive almost weekly in Rangoon, no
foreign company has so far risked large scale capital investment in Burma.

Burmese law allows foreign investors to form either wholly owned
enterprises or joint ventures in which the foreign partner must take at
least 35%. Investors are promised a three-year tax holiday, and profits
reinvested in the enterprise within one year are tax-exempt. Capital
equipment and inputs can also be imported free of duties, and there are
guarantees that profits can be repatriated.

On the face of it, this is surprisingly liberal. But the law is little more
than a broad guideline, and much uncertainity remains. For example, the law
lists various cases of tax exemption, but it does not say whether taxation
will be applied uniformly to all foreign enterprises, or if various types
of taxation will be applied to the different categories of business.

And it is not certain what percentage of profits can be repatriated by a
foreign investor when an enterprise is established as a joint venture. The
law also carefully avoid saying whether or not foreign investors can buy
land for factories and plantations. Arbitration of commercial disputes is
also hazy.

However, the biggest stumbling blodk in foreign investment is the Burmese
Government's stubborn refusal to acknowledge that the country's currenty is
grossly over valued. Officially, one US dollar fetched Kyats 6.50 -- but
the black-market rate is Kyat 50-55, with the selling rate as high as Kyats
75. The IMF has tried to pressure Burma into a 90% devaluation. But in a
speech on 10 November, the chairman of the ruling State Law and Order
Restoration Council (Slorc), Gen. Saw Maung, ruled theat out, arguing that
devaluation would only increase Burma's foreign debt, now approaching
US$4.9 billion.

One foreign economist commented: "With a more realistic exchange rate,
foreign investment would follow more easily and the country's overall
economic situation would improve." But many foreign businessmen believe
that the refusal to devalue the dyat stems from the country's de facto
strongman, Gen. Ne Win, who apparently vowed in the early 1960 that "there
will be no devaluation as long as I am in power."

That suspicion points at Burma's main problem: real power, political as
well as financial, remains concentrated in the hands of a privileged few.

For example, the officially prefered point of first contact for most
businessmen, foreign as well as local, is a new Burmese company called the
Associated Business Consultancy Services Ltd. This company is said to be
able to arrange deals in an enormously wide range of commercial activities.
Closer inspection reveals this company to be controlled by Aye Zaw Win, Ne
Win's son-in-law.

IRonically, Burma's economy is even more centralised today than it used to
be under the previous socialist system," an economic analyst said. "When it
all was supposedly illegal and  conducted in the black market, it worked
fairly well in unofficial way. Today, free trade has been institutionalised
and new laws are being implemented. The result is that many small and
middle-scale traders are being squeezed out since they can't compete with
the big, well-connected bussinessmen."

A foreign businessman who recently visited Burma complained that the ruling
military's atitude to private business is one of deep suspicion and
contempt," and that there is "a feeling that the new trends have to be
strictly controlled and regulated."

Analysts argue that when no flood of foreign money greeted the new laws,
Slorc began selling off Burms's vast natural resources to neighbouring
countries, and this is where much of the new "investment" has materialized.

The first to respond were the Thais, who secured 22 logging concessions
inside Burma worth more than US$100 million. Eight different Thai,
Malaysian, Singaporean and HOngkong companies were awarded fisning licences
totalling US$17.7 million. The annual Gens, Jade and Pearl emporium held in
Rangoon in March raised US$11.28 million of foreign exchange. By June,
after a few more similar deals had been struck, Burma's foreign-exchange
reserves had risen to US$150 million.

Then, however, the first joint ventures were also under way. On 19 August,
a deal was signed between the Burmese Government and SKS Marketing Ltd, a
small Singaporean company which opened a department store in Rangoon, in
addition to a similar outfit run by Daewoo of South  KOrea which began
selling imported consumer goods in Rangoon on 26 July. On 27 August, Burmal
Holdings of Malaysia set up a retail and wholesale joint venture. Another
Singaporean company, Woodwork and Construction Pte Ltd, signed a joint
venture deal on 23 September to produce wooden door leaves. ON 12 October,
an Australian company, IAEB, signed an agreement to build five-star hotels
in Rangoon, Mandalay and Pagan.

The main breakthough came in October and NOvember when the Burmese
Government announced production-sharing contracts with a number of foreign
oil companies, among them Yukong of South Korea, Idemitsu of Japan, Amoco
and Unocal of the US, Petro Canada, Britain's Croft Exploration and Dutch
Shell.

However, one major disincentive to would-be foreign investors is that no
one wants to be seen as the friend of the present military regime, which is
despised domestically and condemned internationally for its absymal
human-rights record. Privately, foreign businessmen concede that possible
trade sanctions against the Burmese regime are a major worry. In the US, a
bill has already been presented to Congress to bar the import of Burmese
logging and fishery products. Probably anticipating a ban, a US furniture
company, Smith & Hawken, decided on 1 August stop importing Burmese teak.
And few observers doubt that Thai and Singaporean companies will pay dearly
for their premature eagerness to get into the Burmese market if and when a
democratically elected government takes over.

The problem was also illustrated by Coca-Cola of the US which, according to
the state-run Working People's Daily of 23 September, signed an agreement
for the production, distribution and sale of its soft drinks in Burma.
Burma's militant student movement quickly announced its intention to launch
a worldwide boycott of Coca-Cola. Coca-Cola responded that it had merely
"investigated the possibilities" of marketing its products in Burma. If the
Coca-Cola deal goes through, it will be the first major capital investment
in Burma.

Little if any of the foreign exchange raised by the new policies has been
used for badly needed industrial and economic development. Instead, Slorc
has spent most of it on imported arms and ammunition. "Apart from an
abundance of new parks and a few totally unnecessary foot-bridges in
Rangoon, the government has done nothing to improve the living standard of
the people, or to encourage private enterprise and production. On the
contrary, there are credible reports of malnutrition in some Rangoon
suburbs -- for the first time in our history," a Burmese source commented.

The conditions that produced last year's upheval are still there, and are
even worsening, according to diplomatic as well as Burmese sources. Foreign
investors are clearly aware of that, and even the usually cautious United
Nations Development Programme concludes in an official report:"It is
unlikely that any foreign investment will be forthcoming until a nationally
elected democratic government is in place."
****